Bankruptcy Settlement Rejected Under New SCOTUS Precedent

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By Daniel Gill

A proposed settlement and sale of estate property was denied April 25 by a Tennessee bankruptcy court that relied on recent Supreme Court precedent ( In re Fryar , 2017 BL 136126, Bankr. E.D. Tenn., 1:16-bk-13559-SDR Chapter 11, 4/25/17 ).

The decision by Judge Shelley D. Rucker of the U.S. Bankruptcy Court for the Eastern District of Tennessee is one of the first to cite the recently decided Czyzewski v. Jevic Holding Corp. , 137 S. Ct. 973, U.S., 3/22/17 , as it weighed whether to approve a proposed settlement and sale of estate assets.

It rejected the proposed settlement on grounds that the deal would pay some creditors out of turn.

That Supreme Court ruling may alter how courts analyze settlements, the bankruptcy court said.

“The court realizes that the parties found themselves caught at a time when the settlement standards may have changed based on the Jevic case,” it said.

Under the proposed agreement, one creditor would be paid ahead of other creditors who would have higher priority in a distribution made in Chapter 7 or under a Chapter 11 plan. Because the deviation from priority didn’t “serve a significant Code-related objective,” the court could not approve it under Jevic Holding, it said.

William Fryar filed a Chapter 11 case on Aug. 26, 2016. Chapter 11 protects companies or individuals from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court.

Payment Out of Turn

Fryar entered into a settlement with certain lenders and his business partner, with whom he owned two business entities. Fryar and the other parties to the settlement admitted to the court that “the settlement was to facilitate a business divorce between two business associates.”

However, the proposed sale of the businesses and other assets and the settlement involved “a payment of one unsecured creditor ahead of other prior parties and other unsecured creditors,” the court noted.

The court examined whether the proposed settlement was “fair and reasonable” under the lens of the Jevic Holding case. In that case the Supreme Court held that bankruptcies cannot be terminated by a “structured dismissal” which provides for final distributions to parties outside the statutory priority scheme for paying creditors.

But the case also featured dicta, or authoritative statements cited by the court, acknowledging that in some instances, certain interim payments outside of the priority scheme may be justified. But that may only occur if there are “significant Code-related objectives” supporting them, such as first-day wage orders or payments to critical vendors.

Since the court found no such code-related objective here, it could not find the agreement to be fair and reasonable.

“The proposed settlement should state how it furthers that objective and should demonstrate that it makes even the disfavored creditors better off,” it said.

Fryar was represented by David J. Fulton, Chattanooga, Tenn.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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